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Facts
The assessee, a registered trust, filed a return declaring Nil income. The AO determined Nil income after additions. Subsequently, the CIT invoked Section 263, finding the AO's order erroneous and prejudicial to revenue due to lack of inquiry into a payment of Rs. 90,89,134/- made by the assessee through an intermediary to Dr. Hiremath, who supplied machinery.
Held
The Tribunal held that the CIT correctly invoked Section 263 as the AO failed to make necessary inquiries regarding the payment to Dr. Hiremath. The order was set aside to the file of the AO for reframing the assessment after proper verification and inquiry.
Key Issues
Whether the CIT was justified in invoking Section 263 powers due to the AO's failure to conduct adequate inquiries into the nature and admissibility of a payment made by the assessee, rendering the assessment order erroneous and prejudicial to revenue.
Sections Cited
263, 143(3), 10(23C)(via), 11(1)(a), 12AA, 13, 119, 143(3A), 143(3B), 144B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS ASTHA CHANDRA
Grant Medical Foundation CIT Exemption, Pune 40, Sassoon Road, Vs. Ruby Hall Clinic, Pune – 411001 PAN: AAATP1145P (Appellant) (Respondent) Assessee by : Shri Rahul Khare (through virtual) Department by : Shri Amol Khairnar – CIT-DR Date of hearing : 02-12-2024 Date of pronouncement : 20-02-2025 O R D E R PER R.K. PANDA, VP :
This appeal filed by the assessee is directed against the order dated 30.03.2024 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. CIT Exemption, Pune relating to assessment year 2018-19.
Facts of the case, in brief, are that the assessee is a trust registered under the Societies Registration Act, 1860, under the Bombay Public Trust Act, 1950 and u/s 12AA of the Act. It also qualifies for exemption u/s 10(23C)(via) of the Act vide order of the Chief Commissioner of Income Tax, Pune dated 30.10.2009. It filed its return of income on 08.10.2018 declaring total income at Nil. The Assessing Officer passed the order u/s 143(3) r.w.s 143(3A) & 143(3B) of the Act on 08.04.2021 determining total income at Nil after making addition of Rs.7 crores on account of non corpus donation and disallowance of depreciation of Rs.33,00,69,972/-. However, since after making the above additions and after allowing the accumulation u/s 11(1)(a) of the Act to the extent of 15% of gross receipts at Rs.73,63,65,615/-, the net surplus was Nil for which the Assessing Officer determined the taxable income at Nil.
Thereafter, the Ld. CIT(Exemption) on examination of the record noted that information was received from the Assessing Officer NaFAC of M/s Aarti Enterprises. It was informed that during the scrutiny proceedings of Ms Aarti Virendra Shah (Prop. Aarti Enterprises), the ReAC AO found that Ms Aarti Shah had entered into a Tripartite Memorandum of Understanding with Grant Medical Foundation and Dr MS Hiremath, to manage the equipments supplied by Dr MS Hiremath installed at Ruby Hall Clinic. As verified from MoU, the machines supplied were owned by Dr MS Hiremath, but M/s Aarti Enterprises was paid an amount of Rs.90,89,134/- by Grant Medical Foundation, out of which Rs.53,45,118/- was paid by M/s Aarti Enterprises to Dr. M.S. Hiremath. The reasons for the assessee in making the payment to Dr M S Hiremath through M/s Aarti Enterprises casts a doubt in its nature and admissibility as application of income. More so, since the Tripartite Memorandum of Understanding is only notarized and is an unregistered document. The aforementioned information was passed on to the CIT(Exemption) by the NaFAC on 29.03.2021, for taking necessary actions as per provisions of the Act, as deemed fit.
He however, noted from the order passed u/s 143(3) dated 08.04.2021 that the Assessing Officer has not taken into consideration the aforementioned information shared by the Jurisdictional Assessing Officer in the assessment order either in the form of discussion or communication with the assessee or in the form of an office note. Since the issue of payment made to M/s. Aarti Enterprises, which in turn made to Dr M.S. Hiremath, was not examined by the Assessing Officer, therefore, he held that the order has become erroneous and prejudicial to the interest of Revenue. He, therefore, issued a notice u/s 263 of the Act asking the assessee to explain as to why the proceedings u/s 263 of the Act should not be initiated.
The assessee filed a detailed reply. However, the Ld.CIT(Exemption) was not satisfied with the arguments advanced by the assessee and held that the order passed by the Assessing Officer has become erroneous as well as prejudicial to the interest of Revenue for which he set aside the order with a direction to the Assessing Officer to reframe the assessment as per law and after considering the submissions of the assessee by observing as under: ―07. The assessee's reply is duly considered. However, the same is not found to be satisfactory, hence not acceptable. Shri M.S.Hiremath is employed by the trust assessee. The trail of money required enquiry by the AO. The AO has not made any enquiry with respect to this aspect of the transaction. The application of money has to be made for the objects of the trust. The AO ought to have enquired as regards the role of Arti Enterprise in sharing the money with the owner Shri Hiremath. Since Shri Hiremath is a senior specialist doctor employed with the assessee, the requirement of routing through Arti Enterprises, which happens to be a proprietorship concern as regards its expertise has not been substantiated by the assessee. The assessee inspite of knowing the reasons mentioned in the show cause notice has not been able to furnish the rationale behind the out go of substantial money as Rent. The assessee ought to have furnished the cost of the machines and the year of purchase so that any observation could have been made on the reasonableness of the outgo. Any irrational outgo cannot be said to have been incurred for the purposes of the objects and that an interested party was involved so also there is an apparent routing of money is sufficient information to raise concerns as regards the purported application of funds. Therefore, having not made any enquiry at all on this aspect, the AO has passed an erroneous order which is prejudicial to the interest of revenue.
8. Section 263 of the Income Tax Act has been amended to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner: - (a) The order is passed without making Inquiries or verification which should have been made. (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; oг (d) The order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. Thus, the provisions of Section 263 of the Act are squarely applicable in this case.
9. The reliance can be placed on the decision in the case of Hon'ble Supreme Court in the case of Deniel Merchants Pvt. Ltd. vs. ITO (Appeal No. 2396/2017) dated 29.11.2017 wherein, the Hon'ble Supreme Court has dismissed SLPs by observing the following: "In all these cases, we find that the Commissioner of Income Tax had passed an order under Section 263 of the Income Tax Act, 1961 with the observations that the Assessing Officer did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) insofar as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. It is this order which is upheld by the High Court. We see no reason to interfere with the order of the High Court 9.1 Reliance can be placed on the decision in the case of Swarup Vegetable Products Vs CIT[1991] 54 Taxman 175 (Allahabad) which confirm the action u/s 263 by the CIT as under: Assessee received certain amount by way of refund of excise duty and claimed that he had placed this amount in suspense account as a large part of this amount was claimed by one G and a suit and also a writ petition filed by G in this regard were pending before Courts and, thus, this amount did not constitute his income. ITO accepted assessee's claim without making proper enquiries Commissioner acting under section 263, set aside assessment order on ground that it was clearly erroneous and also prejudicial to revenue inasmuch as claim of assessee was accepted without proper enquiries and directed ITO to make fresh assessment after making proper enquiries and recording a finding. The Hon'ble court upheld the order of the Commissioner by observing as under "5...... The ITO had accepted the claim erroneously and that too without making proper enquiries. In view of these circumstances the Commissioner came to the conclusion that the ITO's order was erroneous inasmuch as t was not passed after a full enquiry and a proper investigation and that it is also prejudicial to the revenue." 9.2 The High Court of Delhi in the case of ITO v. D.G. Housing Projects Ltd 20 taxmann.com 587 (Delhi) has thoroughly examined the powers of revision u/s 263 of the Act. While examining the issue, the Hon'ble court made distinction among following situations: (1) Situation where no enquiry was conducted by the AO: The Hon'ble court held that in such situation, the order becomes erroneous because enquiry or verification has not been made by observing as under. *11. The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word "erroneous" includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits.
In the light of the detailed discussion made hereinabove, it is evident that the Assessing Officer failed to make necessary enquiries and verifications with regard to the facts of the case on account of which the assessment order u/s 143(3) r.w.s. 144B dated 12.08.2021 is erroneous in so far as it is prejudice to the interests of Revenue.
11. Therefore, in view of the above facts, the assessment order u/s 143(3) r.w.s. 144B dated 12.08.2021 is hereby set aside on the above to the file of the assessing officer. The AO is directed that the assessment should be reframed as per the provisions of law, after considering proper fact submissions of the assessee and also for necessary verification in the light observations made above, after affording proper opportunity to the assessee the time allowed under the Income- tax Act, 1961.
12. The appellant assessee has not furnished the rationale behind making substantial payments to Shri Hiremath which is routed through Arti Enterprise, Without prejudice to the fact that the assessment order passed by the assessee is erroneous insofar it is prejudicial to the interest of revenue and the findings as to why the same is held to be so has already been noted in this order, the case requires to be set aside for ascertaining reasonableness of the outgo so also to visit the money trail whereby an enquiry is warranted to determining as to whether any benefits have been provided to the prohibited persons within the definitions of section 13 of the IT Act, and further for providing assessee opportunities of being heard as a principal of natural justice.
13. Therefore, in view of the above facts, the assessment order u/s 143(3) r.w.s 144B of the I.T. Act on 18.04.2021 is hereby set aside on the above to the file of the assessing officer. The AO is directed to ensure that the assessment is reframed as per the provisions of law, after considering proper fact submissions of the assessee and also for necessary verification in the light observations made above, after affording proper opportunity to the assessee the time allowed under the Income-tax Act, 1961. The issues of enquiries have been clearly set out in this order. However, for making de novo assessment the timeline as prescribed by the Hon'ble Jurisdictional High Court in the case of Late Mr. Lakhpatrai Agarwal) Through L/H Sunil L. Agarwal vs. Assistant Commissioner of Income Tax, Circle 7, Pune in WRIT PETITION NO. 9937 OF 2022 may be adhered to.
14. For the reason that the proceedings are being set aside and therefore, the same will be completed as remand proceedings, I find it advisable for the AO to consider the following judicial propositions while finalizing the assessment order pursuant to this 263 order: a) The AO shall adhere to the proposition laid by the Hon'ble Supreme Court in the case of Commissioner of Customs (Imports). Mumbai v. Dilip Kumar & Company & Ors. in Civil Appeal No. 3327 of 2007 whereby it is held that in case of any ambiguity in the interpretation of law the interpretation favouring revenue should be followed in matters related to 'exemptions" b) The AO should follow the precedents set by following case laws whereby it has been held that the proceedings initiated for the interest of revenue cannot be allowed for the benefits of the assessee. i) CIT v. Sun Engineering Works (P.) Ltd [1992] 198 ITR 297 (SC) ii) CIT v. Caixa Economica De Goa [1994] 210 ITR 719 (Bombay) c) However, if any benefit is claimed by the assessee which could be requested through any alternate remedy, he/she/it should be advised to adopt/explore alternate mechanism under section 119 or any other provisions available as propounded in the case of Hon'ble Apex court in M/s. Vishwanath Traders v. Union of India & Ors. [Special Leave to Appeal (C) No(s). 15594 of 2023 dated August 04, 2023].
d) The ratio laid in the case of Goetze (India) Ltd. vs Cit on 24 March, 2006 in [2006] 284 ITR 323 (SC) is squarely applicable as the remand proceedings are extension of a revisional proceedings and not appellate proceedings, therefore any fresh claim other than what has been made in the ITR may not be made available to the assessee.‖
Aggrieved with such order of the Ld. CIT(Exemption), the assessee is in appeal before the Tribunal by raising the following grounds:
The proceedings initiated u/s 263 is not only bad in law but also void because it was based on surmises and conjectures hence liable to be quashed.
2. The learned Commissioner of Income Tax (Exemption), Pune was not justified in the facts and circumstances of the case to treat amount of Rs.90,89,134 paid by Grant Medical Foundation to M/s Arati Enterprises as admissible application of income 3. The learned Commissioner of Income Tax (exemption), Pune has erred in treating the assessment order passed u/s 143(3) dt. 08/04/2021 by Income Tax Department, NaFAC as erroneous in so far as that is prejudicial to the interest of the revenue. 4. The learned Commissioner of Income Tax (exemption), Pune has erred in setting aside the assessment order u/s 143(3) to the file of assessing officer with necessary verification in the light of observation and inquiries as per the order. 5. The appellant craves leave to add, alter, delete or substitute all or any of the grounds of appeal
6. Such other order or orders may be passed as deemed fit and proper.
The Ld. Counsel for the assessee strongly challenged the order of the Ld. CIT(Exemption) in invoking the jurisdiction u/s 263 of the I.T. Act. Referring to the order dated 23.09.2024 passed by the CIT(A), copy of which is placed at pages 17 to 34 of the paper book, he submitted that the Ld. CIT(A) has granted 100% relief to the assessee. He submitted that in the instant case the assessee has earned income of Rs.3.24 crores after making payment of Rs.90,89,134/- to M/s. Aarti Enterprises. Further, Dr. M.S. Hiremath is not an employee of the assessee.
Referring to the Explanation (2) to section 263 of the Act, the Ld. Counsel for the assessee drew the attention of the Bench to the same, which reads as under: ―263……. Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,—
(a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.‖
He submitted that although the Explanation (2) was inserted by the Finance Act, 2015 w.e.f. 01.06.2015, however, the Ld. PCIT has not invoked the same. Referring to the decision of Hon'ble Supreme Court in the case of M/s. The Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC), he submitted that for invoking the provisions of section 263 of the Act, the twin conditions namely, the order is erroneous and the order is prejudicial to the interest of Revenue, must be satisfied. However, since the order in the instant case is not prejudicial to the interest of Revenue as the assessee enjoys the benefit of deduction u/s 12AA and also qualifies for exemption u/s 10(23C)(via) of the Act. Therefore, the Ld. CIT(Exemption) was not justified in invoking the jurisdiction u/s 263 of the Act. He also relied on the following decisions: i) Pr.CIT vs. Shreeji Prints (P.) Ltd. (2021) 130 taxmann.com 294 (SC) ii) Aarvee Denims and Exports Ltd. vs. Pr.CIT (2024) 167 taxmann.com 249 (Ahmedabad – Trib.)
10. The Ld. DR on the other hand heavily relied on the order of the Ld. CIT(Exemption) assuming the jurisdiction u/s 263 of the Act. Referring to the order passed u/s 143(3) of the Act, he submitted that the Assessing Officer has not made any enquiry about the payments made towards supply of machinery by one of the employees. Since the Ld. CIT(Exemption) has elaborately discussed the issue and has restored the issue to the file of the Assessing Officer for passing the order after making proper enquiry, therefore, the same should be upheld and the grounds raised by the assessee be dismissed.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(Exemption) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. It is an admitted fact that information was received by the Assessing Officer from the Assessing Officer NAFC of M/s. Aarti Enterprises that Ms. Aarti Virendra Shah, proprietor of M/s. Aarti Enterprises has entered into a tripartite MoU with Grant Medical Foundation and Dr. M.S. Hiremath to manage the equipment supplied by Dr. M.S. Hiremath installed at Ruby Hall Clinic. Further, the machines supplied were owned by Dr. M.S. Hiremath but M/s. Aarti Enterprises was paid an amount of Rs.90,89,134/- by Grant Medical Foundation, out of which Rs.53,45,118/- was paid by M/s. Aarti Enterprises to Dr. M.S. Hiremath. We find although the specific information was received by the Assessing Officer, however, the Assessing Officer has not made any enquiry about the information so received. Further, the tripartite MoU is only a notarized one and not a registered document. Since the Assessing Officer has not made any enquiry with respect to the above transaction especially the role of M/s. Aarti Enterprises in sharing money with the owner of machinery Dr. M.S. Hiremath, who is the specialist doctor with the assessee, therefore, the order passed by the Assessing Officer, in our opinion, has become erroneous and prejudicial to the interest of Revenue. The argument of the Ld. Counsel for the assessee that it will not make any difference since the assessee is enjoying the benefit of sections 12AA and 10(23C)(via) and therefore the same is not prejudicial to the interest of the Revenue cannot be accepted at this point especially when specific information was received by the Assessing Officer. Whether it will have any impact or not, is a subsequent matter only when the same is examined and there is due application of mind. The various decisions relied on by the Ld. Counsel for the assessee in our opinion, are distinguishable and not applicable to the facts of the present case in view of the specific information received by the Assessing Officer was not at all examined.
So far as the decision of Hon'ble Supreme Court in the case of PCIT vs. Shreeji Prints (P) Ltd. (supra) is concerned, we find in this case the Hon'ble Supreme Court has dismissed the SLP against the order passed by the Hon’ble High Court holding that where the assessee company had received unsecured loans from two different companies and the Assessing Officer had made enquiries in detail and accepted the genuineness of the same, such view of the Assessing Officer being a plausible view could not be considered as erroneous or prejudicial to the interest of Revenue. However, in the instant case, as mentioned earlier, there is absolutely no discussion whatsoever by the Assessing Officer of the information received from the Assessing Officer regarding the payment made to Dr. M.S. Hiremath by M/s. Aarti Enterprises to manage the equipments installed at Ruby Hall Clinic.
So far as the decision of the Ahmedabad Bench of the Tribunal in the case of Arvee Denims and Exports Ltd. vs. PCIT (supra) is concerned, the assessee had filed the requisite details and the Assessing Officer had examined the same. Therefore, this decision is also not applicable to the facts of the present case.
So far as the decision of Hon'ble Supreme Court in the case of M/s. The Malabar Industrial Co. Ltd. vs. CIT (supra) is concerned, no doubt the Hon'ble Supreme Court has held that the twin conditions namely the order is erroneous and prejudicial to the interest of Revenue must be satisfied for invoking the revionary power u/s 263 of the Act. Since in the preceding paras we have already held that the order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of Revenue, therefore, this decision is also not applicable to the facts of the present case. In this view of the matter and in view of the detailed reasoning given by the Ld. CIT(Exemption) for invoking the jurisdiction u/s 263 of the Act, we do not find any infirmity in the same. Accordingly, the same is upheld and the grounds raised by the assessee are dismissed.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open Court on 20th February, 2025.
Sd/- Sd/- (ASTHA CHANDRA) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 20th February, 2025 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपीलार्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. The concerned Pr.CIT 4. DR, ITAT, ‘B’ Bench, Pune 5. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 1 Draft dictated on 11.02.2025 Sr. PS/PS 2 Draft placed before author 12.02.2025 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to the Head 9 Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order